Small Businesses More Likely to Raise Prices as Tariffs Remain in Place
The longer a small and medium-sized business (SMB) expects new U.S. tariffs to be in place, the greater the percentage of that cost they expect to pass along to consumers, according to a paper published Monday (Sept. 29) by the Federal Reserve Bank of Boston.
The paper said that SMBs whose costs are affected by new U.S. tariffs saw the average tariff rate they pay rise from 6.5% in January to 11.4% in July.
“Our analysis detects an important feature of beliefs about evolving trade policy and planned pricing policies: SMBs that believe the new tariffs will persist for a year or longer anticipate notably higher pass-through rates; compared with their counterparts that believe the new tariffs will be short-lived, the former expected to pass through as much as three times more of their cost increases into consumer prices,” the paper said.
The Federal Reserve Bank of Boston said in its summary of the paper that the views expressed in the paper are those of the authors alone.
As of August, overall, SMBs expected to pass through one-half of their cost increases to consumers, according to the paper. Among those who expect the tariffs to last longer, that share is greater.
As of August, over 45% of SMBs expect their own costs to be impacted for more than a year, the paper said.
These tariffs could drive a 0.75% near-term increase in core consumer prices, per the paper. This estimate assumes that SMBs pass through 50% of the cost of tariffs to their customers.
It was reported Monday that tariffs are placing an increasing strain on small businesses in the United States. These merchants are vulnerable to price increases and putting profit margins at risk because they hesitated to raise prices for fear of repelling customers.
On Saturday (Sept. 27), it was reported that with the new import levies announced last week on prescription drugs, heavy trucks and furniture, Americans are facing the highest tariff rates since 1934. The overall average effective tariff rate now stands at 17.9%.
PYMNTS Intelligence found in April that the turbulence caused by tariffs may cause especially acute pain for SMBs.
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